We bet investors have been eagerly waiting for the final “show hand” of the remaining six gems in the Shares Investment Portfolio after the unveiling of the first six in issue 425. Let us jump straight to the next SPARKLING SIX!

Stable – Olam
Moving Towards Basic Food Commodities Space
While heightened volatility in 2011 caught up with the commodity sector, with signs of margin pressures becoming more apparent in small players, soft commodity players like Wilmar International and Olam International (Olam) still show a resilient outlook. Compared to hard commodity peers, they are expected to perform better.

Among these soft commodity players, the relatively recession-resistant commodity portfolio of Olam, with more than 70% in food commodities, is what intrigues us. To further insulate itself from counterparty, credit and inventory risks, the bulk of its exposure is forward-hedged.

Banking on the resiliency of its food category, which also registered the largest share of net contribution at 32.2% in 1Q12, Olam has shifted its gears towards the production and growth of staples in Nigeria. In December, Olam announced its investment plans totalling US$99.2 million to set up a 6,000 hectare paddy farming and rice milling facility as well as expand its wheat milling capacity at Crown Flour Mills in the country.

Olam’s route to growing its feed is a positive. The production of paddy and its subsequent processing into rice in the country is a fundamentally attractive industry due to high import cost duties imposed and favourable government policies spurring local production.

Based on the investments aforementioned, Olam’s total outreach in the two staple fields will expand considerably in Nigeria. This could see Olam in an advantageous position to select attractive value chains to integrate into its broader network in the Nigerian staple market.

Stable – OCBC Bank
Prospering On Asia’s Rising Wealth
Ranked as the world’s strongest bank in May 2011 by Bloomberg for its strong fundamentals and business growth potential from its regional expansions, Oversea-Chinese Banking Corporation (OCBC) is our ideal choice amongst the three local banks. Trailing at a price-to-earnings ratio of 12 times for FY10, OCBC has the lowest non-performing loans ratio of 0.7% as at 30 September 2011 whereas those of DBS and UOB were at 1.3% and 1.5% respectively.

Testimony to its success in business development, OCBC, which grabbed the headlines in 2009 when it acquired the private banking business of ING Group for US$1.46 billion in cash, has seen this private banking franchise stage an impressive asset under management (AUM) growth of more than 80% to US$29 billion as at 30 September 2011 compared to pre-acquisition AUM of US$15.8 billion as at August 2009.

Besides being quick in seizing opportunities in Asia’s burgeoning rich, the foresight to grab the opening is paramount. This can be observed from OCBC’s moves to widen its distribution channels in Malaysia, which currently contributes about 22% of total revenue for OCBC. OCBC plans to capture a greater share in Malaysia, including Islamic banking – a capital market estimated at more than US$1 trillion – and Takaful insurance. The bank entered an agreement to acquire five companies from its 63.5%-owned listed subsidiary, PacificMas, for RM428.2 million, to streamline its operations. Notably, Bloomberg also recently reported that OCBC is acquiring a 49%-stake in the brokerage business of Malaysia’s KAF-Seagroatt & Campbell to bolster its presence in Malaysia.

High Yielding – LMIRT
Indonesia’s Growing Retail Sales Not To Be Overlooked
Indonesia’s retail market is no doubt eye-catching given that the country is being ranked the world’s third most populous nation with nearly 246 million people. As Indonesia’s economy is driven mainly by domestic demand, Indonesian retail sector, safely to say, still remains largely unfazed by the slowdown in the global economy, backed by hefty retail sales and rapid modernisation.

According to Central Bank of Indonesia, the country’s retail sales grew 26.6% in November from a year ago, slower than October’s 30.7%. Yet, Indonesian retailers remain sanguine that sales will increase in the next three to six months, particularly the first quarter of 2012 due to New Year celebration. In this, we direct our attention to Lippo Malls Indonesia Retail Trust (LMIRT), which had earlier raised net proceeds of $330.5 million to partially fund its two high-quality asset acquisitions in Indonesia, namely Pluit Village and Plaza Medan Fair.

Excitingly, the net property income yields of Pluit Village and Plaza Medan Fair stood high at 10.8% and 7.4% respectively, and compared well to LMIRT’s FY10 existing portfolio of 7.5%. Also, the opportunistic purchases are expected to boost LMIRT’s distributable income up by 60.5% from FY10’s $47.9 million, while distributable yield would increase from 8.38% to 8.43%. Not to mention, with a gearing ratio remaining fairly unchanged at around 10% post acquisition, we believe LMIRT has ample debt headroom for additional acquisitions, further approaching its goal of building a $4 billion portfolio over the next four years.

High Yielding – OKP Holdings
Keynes Spells Growth While Dividends Hold Key
Espoused by Keynesian economics, construction of infrastructure is the easiest and fastest way to stimulate the economy in a period of downturn. This is clearly evident as the Singapore government has set aside more than $1.6 billion each year in the recent two years chiefly for the local road network. In 2012, we opine that this figure will remain the same or grow as we see evidence of the government’s intent through the acquisition of the Rochor site for the construction of the 21km North-South Expressway. Following further downward revisions of Singapore’s GDP forecast for 2012, analysts foresee expansionary fiscal policies in Budget 2012, which will be beneficial to overall infrastructure in Singapore. Construction seems to have returned to its former darling after recent upheavals in the private property segment.

As the island-state’s sole listed road specialist, OKP Holdings (OKP), is at the forefront to be a beneficiary of such policies. Currently, OKP has, in its pipeline, several infrastructure projects including the improvement and widening of several expressways as well as construction of roads, drains and sewers. These contracts, worth $433.4 million, are expected to be fulfilled by FY14 and thus provide some earnings visibility in the mid-term. Going forward, the projected increase in contracts for expressway widening and the construction of a new expressway would spell various new opportunities for OKP.

Analysts at OCBC noted that OKP has enjoyed a high tender success rate of 94% and thus believe that the firm will be successful in some of its tenders. Not only does OKP provide earnings stability and growth, the counter also offers a relatively high dividend yield at slightly more than 7%, inclusive of the special dividends that have been issued for the last two consecutive years.

Growth – Global Logistics Properties
Providing The All-In-One Lodging
The largest does not necessarily equate to the best. For Global Logistic Properties’ (GLP) case, the company is a distinct manifestation of such a rare combination. GLP boasts an unparalleled network of modern logistics facilities in Asia, with a presence in 28 key cities across China and Japan. This multi-location web is a natural pull. Evidently, lease ratios in GLP’s portfolio as of 30 September 2011 were over 90% while retention rates stood in excess of 75%. GLP’s integrated schemes, which allow customisation and flexible arrangements to match its customers’ needs, embody those of a best-in-class.

While GLP finished 2011 19% lower, we think that 2012 may mark a change. Beyond the modern logistics facilities scarcity situation the two biggest nations in Asia face, the re-ignition of Chinese government’s commitment to shore up domestic consumption augurs well for GLP, whose China portfolio has 76% leaned towards domestic-related demand. Beginning this year, a national program is implemented with the objective of significantly boosting local retail sales and production. Plus, the negative global macroeconomics outlook may induce hastening of the process.

Meanwhile, in Japan, GLP’s latest collaboration with China Investment Corporation to snap up 15 assets for a relatively cheaper US$1.6 billion further stretches its leadership position in the country. According to DBS Vickers, the transaction is projected to boost FY13 bottom line by 13%.

Furthermore, the stock is also trading at about 13.7% discount to its net asset value at the start of the year and the fact that the Government of Singapore Investment Corporation is an anchor stakeholder of GLP alone, is enough to stir interest.

Growth – Sound Global
Enhanced Government Support Bolsters Earnings Visibility
Plagued by a series of high profile corporate governance blow-ups, S-Chips have long been shunned by investors. However, as China holds too big a promise to ignore, we believe one can ride the nation’s mighty rise through careful stock-picking.

Given China’s planned-capitalism economic model, industries that have been identified for priority development are poised to benefit from the trickling down of government funds in the form of incentives and increased investments. In China’s 12th Five Year Plan (2011 to 2015), emphasis was shifted from chasing heady economic numbers to achieving ‘higher quality growth’. In particular, environmental protection was highlighted as one of the seven priority industries, injecting earnings visibility to companies such as Sound Global.

Established in 1993, Sound Global has grown into one of the leading integrated water and wastewater treatment solutions providers in China. For its final contract win of last year, the company secured a Rmb94 million build-operate-transfer wastewater treatment plant project with a concession period of 30 years. For the whole of 2011, DBS Vickers estimated total contract wins at more than Rmb1.9 billion – quadrupling the amount in 2010 – and noted that order book is likely to maintain at record level of Rmb2.4 billion or higher.

In its 3Q11 financial results, Sound Global’s revenue spiked 38.8% to Rmb1.7 billion on increased contribution from the operation and maintenance as well as turnkey engineering, procurement and construction segments. Gross profit margin improved to 32.4%, leading profit to surge 70.2% to Rmb306.9 million. Over a seven-year period (FY03-FY10), its performance came in equally eye-catching with the top and bottom lines posting compounded annual growth rates of 31.4% and 29% respectively.

Weighing The Portfolio
These six gems, together with last issue’s six, make up the SPARKLING TWELVE in the Shares Investment Portfolio for 2012. So, how is this equity portfolio weighed?

Last issue, we revealed a table showing the weightings assigned to different styles taking on the view of a moderate risk taker and we have categorised these stocks into their various styles. The next step would be balancing the portfolio accordingly to the desired exposure to different risk levels and industries you are positive in. Here is a peek at how we do it.

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Perhaps, our portfolio has provided a good inspiration for you to start rebalancing your own portfolio. However, as an age-old adage suggests not to put all your eggs in the same basket, it is also important to set aside cash reserves for rainy days. With our SPARKLING TWELVE, we wish all investors a prosperous Lunar New Year filled with dazzling returns!